The Central Bank of Nigeria’s demonetization policy (new Naira currency notes policy) and its monetary tightening policy of repeatedly raising the monetary policy rate (MPR) in the past 10 months have not yielded their intended results. In the past 10 months, the CBN has changed its monetary policy in a couple of ways: by raising interest rates and introducing a new naira policy, in an attempt to stabilize the economy. Both economists and the general public have expressed mixed opinions on these measures. While there is a possibility that these actions have been counterproductive in stabilizing prices, it is crucial to determine whether they were successful in achieving the CBN's goals—this report card aims to do just that. 

New Naira Policy 

On October 26, 2022, the CBN announced the implementation of newly redesigned ₦200, ₦500, and ₦1,000 banknotes into the economy. The CBN stated that the redesigned naira notes, combined with new limitations on cash withdrawals, were intended to reduce money laundering, curtail kidnapping, curb inflation, and make digital payments the standard, thus advancing the cashless policy. In addition, the CBN's new naira policy aimed to bring 2.7 trillion naira ($6 billion) from informal channels into the regular banking system and to closely monitor transactions in financial institutions. What was worrisome then and is still worrisome now is the CBN “optimizing for shock value” in communicating its policies. Furthermore, CBN’s communication indicates that it was using its tools of price stability to pursue objectives that are outside its purview – tackling kidnapping and money laundering, while carelessly discounting the trade-offs and unintended negative welfare effects. The core mandate of the CBN is to ensure price and monetary stability, not to tackle kidnapping, money laundering, or even scuttle vote-buying—seeing as Nigeria was in peak electioneering season when the new Naira policy was announced.

The policy has ultimately failed to achieve its intended outcomes and instead created social and financial instability in Nigeria. According to the National Bureau of Statistics (NBS), Nigeria's inflation rate hit a 27-year high in February 2023 at 21.91%, despite a scarcity of currency notes, which should have typically driven prices down or at least made aggregate prices stay static. It is important to note that the new Naira policy by the CBN ensured the reduction of the currency in circulation (CIC) by 2.1 trillion naira from 3.29 trillion naira at the start of the policy's implementation to 982.09 billion naira in February 2023. Such a cash crunch in Nigeria’s cash-dependent environment has already led to an erosion of nearly 20 billion naira off Nigeria’s GDP in the past 60 days, according to projections by a Jos Business School (JBS) economist, Ezekiel Gomos. In addition, according to projections by Nigeria’s Centre for the Promotion of Private Enterprise (CPPE), Nigeria incurred economic losses worth 20 trillion naira due to the CBN's naira redesign policy. This comes as no surprise, as both anecdotal and empirical evidence relay a deceleration of economic activities across Nigeria, a stifling of petty trading activities in urban, semi-urban, and rural Nigeria, as well as a contraction of the informal economy, which constitutes about 57.7% of Nigeria’s GDP. Such is the devastation caused by the botched CBN policy that even the usually ‘recession-proof’ alcoholic beverages sector in Nigeria has not escaped unscathed. In March 2023, the Nigerian unit of the world’s second-largest brewer, Heineken NV, recorded its worst February in 15 years, citing the cash scarcity directly caused by the policy.

Another damning appraisal of the new Naira policy was a society-wide increase in distrust for digital financial transactions, further derailing the CBN’s aforementioned target to make digital payments the standard. Due to a nationwide scarcity of cash, a sudden increase in transactions caused disruptions to the country's digital banking networks, leading to mass delayed payments and lost profit opportunities for both traders and payment service providers. Victor Igono, a Kwakol Research Associate, recently highlighted that despite a 41% increase in transaction volume, there was a 4.1% decrease in transaction value with a significant number of transactions failing in February - using data from the Nigeria Interbank Settlement System (NIBSS). Banks were not the only financial institutions that faced this scalability problem; financial technology firms faced the same challenges. To further highlight the adverse effect of this policy on consumer behavior regarding digital payments, electronic utility payments in Nigeria fell by a whopping 44% in February 2023, despite the Central Bank of Nigeria’s naira redesign policy aimed at growing cashless transactions. 

In addition, due to the economy's cash scarcity engineered by the CBN's new Naira policy, Nigerian telecommunications companies may fall short of revenue goals in the first quarter of 2023. Analysts at Nairametrics indicate that the first quarter of 2023 could see a decline in revenues for Nigerian telecommunications companies listed on the Nigerian Stock Exchange. Nigerian telcos have already experienced network outages as a result of the policy and a decline in airtime sales as a result of customers using their mobile devices for online banking activities, raising concerns about a year-over-year decline in revenues.

Interest Rate Hikes 

The CBN’s Monetary Policy Committee (MPC) has increased the Monetary Policy Rate (MPR) otherwise known as the benchmark interest rate, six times in the past 10 months in a bid to reduce inflationary pressure - increasing it for the first time in two years in May 2023, from 11.5% to 13%. On March 21, 2023, the CBN increased the interest rate by 50 basis points from 17.5% to 18%, in an aggressive ploy to curtail the high headline inflation rate in Nigeria. 

As seen in Figure 1, the CBN’s aggressive push to contain Nigeria’s high inflation by deploying monetary tightening as part of its monetary policy through repeated interest rate hikes has not yielded the intended result. Inflation continues to rise unabated, mostly because the monetary tightening approach is not the right way to contain Nigeria’s supply-side or cost-push inflation. It is important to note that Nigeria’s inflation is driven by supply-side concerns that raise the cost of production and inadvertently, consumer prices. The main drivers of inflation in Nigeria include foreign exchange shortages, high energy costs, frequent energy scarcity, insecurity, weak purchasing power, and low productivity. This was already highlighted in an elaborate economic analysis and prescription article early this year for Nigeria’s incoming president. 

Although Nigeria's inflationary environment differs from that of the U.S., the CBN has implemented the same monetary policies as the U.S. With an adequate supply of goods, services, and money in circulation, demand is what drives inflation in the United States. Nigeria's inflation, in comparison, and as aforementioned, is supply-driven and the result of production constraints and low productivity. To develop successful prescriptions to contain inflation, the CBN needs to recognize this distinction. The CBN's current policy of tightening the money supply by increasing interest rates to curb inflation is counterproductive in Nigeria. The country already faces cash scarcity, affecting everyone, including food producers and manufacturers. This policy will make it even harder for supply-driven businesses to access short-term loans, affecting their productivity and output. This will only result in a further increase in inflation, as has been noted in Figures 1 and 2. 

Conclusion

All of the delineated intentions of the CBN behind the execution of its new Naira policy and its interest rate hikes in the past year have not been fulfilled; instead, the country is reeling through another crunch economic period as a consequence of the poorly executed policies. First, the reduction of the currency in circulation (CIC) by 2.1 trillion naira has caused a cash crunch in Nigeria’s cash-dependent environment, resulting in an erosion of nearly 20 billion naira off Nigeria’s GDP in the past 60 days and even adversely affecting Nigeria’s traditional inflation-proof industry: the alcoholic beverage manufacturing industry. Additionally, the informal economy, which constitutes about 57.7% of Nigeria’s GDP, has been badly hit, and there has been a stifling of petty trading activities in urban, semi-urban, and rural Nigeria. Furthermore, the policy has led to a society-wide reduction of confidence in digital financial transactions due to the high transaction failure rates, which derails the CBN's target to make digital payments the standard. Secondly, the monetary tightening approach deployed by the CBN to contain Nigeria's inflation has not yielded the intended result, as Nigeria's inflation is a supply-side inflation and not a demand-driven one. The repeated interest rate increases have only contributed to higher inflation rate numbers, according to data from Nigeria’s premier statistical body, the National Bureau of Statistics (NBS). 

As already noted in an earlier article, tackling inflation and ensuring price stability in the Nigerian economic context will require a holistic approach laden with peculiar measures that are unique to curtailing the country’s major inflation drivers. The core theme of this school of thought is to tackle the supply side of the economy, which is the primary cause of Nigeria’s decades-long inflationary environment. What the CBN has done so far has been to target the demand side of the economy, and it has simply not worked.